136 PART • Producers, Consumers, and Competitive Markets • bandwagon effect Positive network externality in which a consumer wishes to possess a good in part because others people who join the site, the more valuable it will become If one social networking site has a small advantage in terms of market share early on, the advantage will grow, because new members will prefer to join the larger site Hence the huge success of personal website Facebook and professional website LinkedIn A similar story holds for virtual worlds and for multiplayer online games Another example of a positive network externality is the bandwagon effect— the desire to be in style, to possess a good because almost everyone else has it, or to indulge a fad The bandwagon effect often arises with children’s toys (video games, for example) In fact, exploiting this effect is a major objective in marketing and advertising toys Often it is the key to success in selling clothing Positive network externalities are illustrated in Figure 4.17, in which the horizontal axis measures the sales of a product in thousands per month Suppose consumers think that only 20,000 people have purchased a certain product Because this is a small number relative to the total population, consumers will have little incentive to buy the product Some consumers may still buy it (depending on price), but only for its intrinsic value In this case demand is given by the curve D20 (This hypothetical demand curve assumes that there are no externalities.) Suppose instead that consumers think 40,000 people have bought the product Now they find it more attractive and want to buy more The demand curve is D40, which is to the right of D20 Similarly, if consumers think that 60,000 people have bought the product, the demand curve will be D60, and so on The more people consumers believe to have purchased the product, the farther to the right the demand curve shifts Ultimately, consumers will get a good sense of how many people have in fact purchased a product This number will depend, of course, on its price In Figure 4.17, for example, we see that if the price were $30, then 40,000 people would buy the product Thus the relevant demand curve would be D40 If the price were $20, 80,000 people would buy the product and the relevant demand curve would be D80 The market demand curve is therefore found by joining the Price (dollars per D 20 unit) F IGURE 4.17 D 40 D 60 D 80 D 100 30 POSITIVE NETWORK EXTERNALITY With a positive network externality, the quantity of a good that an individual demands grows in response to the growth of purchases by other individuals Here, as the price of the product falls from $30 to $20, the positive externality causes the demand for the good to shift to the right, from D40 to D80 20 Demand 20 40 Pure price effect 48 60 80 Externality effect 100 Quantity (thousands per month)